The Tax Implications of Divorce
We often consider tax implications when negotiating a divorce settlement. Currently, alimony paid under a divorce decree or separation agreement is tax deductible under IRS rules. See 26 U.S. Code § 215. However, the cost of divorce increases for many if the proposed tax bill is signed into law. This is because the current proposal includes a provision to change the tax treatment of alimony.
Proposed House Bill
The proposed bill eliminates the alimony tax deduction which would have a major impact on divorce agreements. Ex-spouses who pay alimony could no longer deduct it and ex-spouses who receive it would no longer pay tax on it. This change could affect old divorce settlements in addition to those reached on or after 2017. As a result, it could affect a payor’s ability to pay.
All individuals divorced or separated after 2017 who pay or receive alimony will be affected. And some who were divorced before 2017 may be affected when they modify the prior agreement. The text of the bill provides that the new tax treatment would also apply to:
Any divorce or separation instrument
(as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.
If for example, a husband agreed to pay $3,000.00 per month in alimony and had been in a 28% tax bracket, the net cost of the monthly payout was approximately $2,160.00 per month in “real dollars.” Under the new bill, the cost will actually be $3,000.00 per month.
The law may change to eliminate the special tax treatment for alimony payments. However, we cannot predict the result until a final bill is signed into law.